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Cisco Systems, Inc. 2014 Annual Report

Table of contents

  • Page 1
    Cisco Systems, Inc. 2014 Annual Report

  • Page 2

  • Page 3
    ...back on fiscal 2014, we could describe it as one of the most innovative years in Cisco's history. Through our innovation strategy of build, buy, partner, and integrate, we brought new architectures to market for the next generation of networking, security, data center, and collaboration products and...

  • Page 4
    ... own internal development with eight strategic acquisitions in fiscal 2014, four in the software space and two each in the areas of data center and security, which, we believe, will enable us to extend our market leadership and create new opportunities. We recognize the growing shift in our customer...

  • Page 5
    ... but demand for our new high-end routing product platforms, the Cisco NCS 6000 Series and the CRS-X, has continued to ramp, and we are focused on continuing to manage the transition to new platforms in fiscal 2015. Service revenue increased 4% from the prior fiscal year, driven by strong renewals...

  • Page 6

  • Page 7
    ... or organization) 77-0059951 (IRS Employer Identification No.) 170 West Tasman Drive San Jose, California (Address of principal executive offices) 95134-1706 (Zip Code) Registrant's telephone number, including area code: (408) 526-4000 Securities registered pursuant to Section 12(b) of...

  • Page 8
    ... ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accountant Fees and Services ...PART IV Item 15. Exhibits and Financial Statement...

  • Page 9
    ... in San Jose, California. The mailing address of our headquarters is 170 West Tasman Drive, San Jose, California 95134-1706, and our telephone number at that location is (408) 526-4000. Our website is www.cisco.com. Through a link on the Investor Relations section of our website, we make available...

  • Page 10
    ... richer experience at much lower price points Our wireless products, where we are seeing strong growth of our cloud networking business, which we acquired from Meraki, Inc. Our software offerings, where we are focused on delivering our technology and solutions via new license models by which we seek...

  • Page 11
    ... 9000 portfolio of switches, enhanced versions of our NX-OS operating system, and the Application Policy Infrastructure Controller (APIC), which provides a central place to configure, automate, and manage an entire network, based on the needs of applications. Cloud Our Intercloud strategy seeks to...

  • Page 12
    ..., branch offices, and data centers. Switches are used within buildings in local-area networks (LANs) and across great distances in wide-area networks (WANs). Our switching products offer many forms of connectivity to end users, workstations, IP phones, wireless access points, and servers and also...

  • Page 13
    ...in the transmission of information and media-rich applications. As to specific products, we offer a broad range of hardware and software solutions, from core network infrastructure and mobile network routing solutions for service providers and enterprises to access routers for branch offices and for...

  • Page 14
    ... Communications IP phones Call center and messaging products Call control Software-based, IM clients Communication gateways and unified communication applications and subscriptions Web-Based Collaboration Offerings • • Cisco WebEx meeting server Cisco WebEx meeting center Cisco TelePresence...

  • Page 15
    ... Blade Servers Cisco UCS C-Series Rack Servers Cisco UCS Fabric Interconnects Cisco UCS Manager and Cisco UCS Central Software Cisco UCS Director Cisco UCS Invicta Series Server Access Virtualization: • Cisco Nexus 1000V • Cisco Nexus 1000V InterCloud During fiscal 2014 we expanded the network...

  • Page 16
    ... 2014, the Connected Mobile Experience (CMX), a Wi-Fi location data analytics platform we introduced in fiscal 2013, continued to experience positive momentum as customers seek new monetization opportunities. Our fiscal 2013 acquisitions of Meraki, Inc. ("Meraki"), a cloud-managed networking company...

  • Page 17
    ... of fiscal 2014, our worldwide sales and marketing departments consisted of 24,740 employees, including managers, sales representatives, and technical support personnel. We have field sales offices in 94 countries, and we sell our products and services both directly and through a variety of channels...

  • Page 18
    ... deliver to customers in target markets through acquisitions, investments, and alliances. To summarize, we employ the following strategies to address the need for new or enhanced networking and communications products and services Developing new technologies and products internally Acquiring all or...

  • Page 19
    ... sale of enterprise data center technologies, including competition from entities that are among our long-term strategic alliance partners. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business...

  • Page 20
    ...and strategic alliance partners could have a material adverse effect on our business, operating results, and financial condition and accordingly affect our chances of success. Research and Development We regularly seek to introduce new products and features to address the requirements of our markets...

  • Page 21
    ... ...Employees by line item on the Consolidated Statements of Operations: Cost of sales (1) ...Research and development ...Sales and marketing ...General and administrative ...Total ...(1) 36,725 37,317 74,042 16,348 25,837 24,740 7,117 74,042 Cost of sales includes manufacturing support, services...

  • Page 22
    ..., upon Cisco's acquisition of StrataCom, Inc., where he served as General Counsel. He served as Cisco's Managing Attorney for Europe, the Middle East, and Africa from December 1996 until June 1999; as Director, Worldwide Legal Operations from June 1999 until February 2001; and was promoted to Vice...

  • Page 23
    ... for approximately two years as chief executive officer of Netigy Corporation, a network consulting company. Prior to that, he was employed by Electronic Data Systems, where he held a number of senior executive positions. Mr. Patel joined Cisco in July 1996 upon Cisco's acquisition of StrataCom, Inc...

  • Page 24
    ..., channel partners, contract manufacturers and suppliers to obtain financing or to fund capital expenditures, especially during a period of global credit market disruption or in the event of customer, channel partner, contract manufacturer or supplier financial problems Share-based compensation...

  • Page 25
    ...periods, including fiscal 2014, and we expect that this weakness will continue for at least several quarters. In addition, reports of certain intelligence gathering methods of the U.S. government could affect customers' perception of the products of IT companies which design and manufacture products...

  • Page 26
    ... margin markets, including markets with different pricing and cost structures, through acquisitions or internal development Sales discounts Increases in material, labor or other manufacturing-related costs, which could be significant especially during periods of supply constraints Excess inventory...

  • Page 27
    ... as our two-tier system of sales to the end customer. Revenue from distributors is generally recognized based on a sell-through method using information provided by them. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits for...

  • Page 28
    ... sale of enterprise data center technologies, including competition from entities that are among our long-term strategic alliance partners. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business...

  • Page 29
    ... these complicated relationships with customers, suppliers, and strategic alliance partners could have a material adverse effect on our business, operating results, and financial condition and accordingly affect our chances of success. OUR INVENTORY MANAGEMENT RELATING TO OUR SALES TO OUR TWO-TIER...

  • Page 30
    ... affect our gross margins. For additional information regarding our purchase commitments with contract manufacturers and suppliers, see Note 12 to the Consolidated Financial Statements. WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS, AND IF WE FAIL TO PREDICT...

  • Page 31
    use of the network as the platform for all forms of communications and IT. For example, in fiscal 2009 we launched our Cisco Unified Computing System (UCS), our next-generation enterprise data center platform architected to unite computing, network, storage access and virtualization resources in a ...

  • Page 32
    ... focus on managing our costs and expenses, over the long term, we also intend to invest in personnel and other resources related to our engineering, sales, service and marketing functions as we realign and dedicate resources on key growth areas, such as data center virtualization, software, security...

  • Page 33
    ... acquisitions, or announced new strategic alliances, designed to position them with the ability to provide end-to-end technology solutions for the enterprise data center. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors...

  • Page 34
    ...temporary or permanent withdrawal from a product or market, damage to our reputation, inventory costs, or product reengineering expenses, any of which could have a material impact on our revenue, margins, and net income. For example, in the second quarter of fiscal 2014, we recorded a pre-tax charge...

  • Page 35
    ..., could harm our business and have a material adverse effect on our operating results and financial condition. A portion of our sales is derived through our distributors. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits for...

  • Page 36
    ...on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected. For additional information regarding our indemnification obligations, see Note 12(g) to the Consolidated Financial Statements contained in this report...

  • Page 37
    ...; or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives, such as timely and effective product introductions. In addition, companies in our industry whose employees accept positions with competitors frequently claim that...

  • Page 38
    ... of customer orders or the manufacture or shipment of our products, our business, operating results, and financial condition could be materially and adversely affected. IF WE DO NOT SUCCESSFULLY MANAGE OUR STRATEGIC ALLIANCES, WE MAY NOT REALIZE THE EXPECTED BENEFITS FROM SUCH ALLIANCES AND...

  • Page 39
    ... as the terms upon which we may borrow under our commercial paper program or future debt issuances. Item 1B. Unresolved Staff Comments Not applicable. Item 2. Properties Our corporate headquarters are located at an owned site in San Jose, California, in the United States of America. The locations of...

  • Page 40
    ... our NGN Routing, Switching and Collaboration products, as well as video solutions deployed by our service provider customers, infringe some of the patents in the Nortel Portfolio. Rockstar seeks monetary damages. A trial date for one service provider customer has been set for October 2015; no other...

  • Page 41
    ... on Cisco's common stock during fiscal 2014 and 2013 may be found in Supplementary Financial Data on page 122 of this report. There were 49,936 registered shareholders as of September 4, 2014. The high and low common stock sales prices per share for each period were as follows: Fiscal Quarter FISCAL...

  • Page 42
    ... dividends) on the date specified. Shareholder returns over the indicated period are based on historical data and should not be considered indicative of future shareholder returns. Comparison of 5-Year Cumulative Total Return Among Cisco Systems, Inc., the S&P Information Technology Index, and the...

  • Page 43
    ... cost for certain products sold in prior fiscal years containing memory components manufactured by a single supplier between 2005 and 2010. See Note 12(f) to the Consolidated Financial Statements. In the second quarter of fiscal 2013, the Internal Revenue Service (IRS) and Cisco settled all...

  • Page 44
    ...businesses of all sizes, public institutions, telecommunications companies, other service providers and individuals. We connect people, process, data and things with products that transport data, voice, and video within buildings, across campuses, and around the world. We are a key strategic partner...

  • Page 45
    ...fourth quarter of fiscal 2014. In fiscal 2014, product revenue declined across all customer markets, with the most significant decline in the service provider market. Within the service provider market, the largest impacts came from the continued product revenue decline in our Service Provider Video...

  • Page 46
    ... strategy and focus areas, see Item 1. Business. Other Key Financial Measures The following is a summary of our other key financial measures for fiscal 2014 compared with fiscal 2013 (in millions, except days sales outstanding in accounts receivable (DSO) and annualized inventory turns): Fiscal 2014...

  • Page 47
    ... exists. Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an arrangement. Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery. The fee is fixed or determinable. We assess...

  • Page 48
    ... which we refer to as two-tier systems of sales to the end customer. Revenue from distributors is recognized based on a sell-through method using information provided by them. Our distributors participate in various cooperative marketing and other programs, and we maintain estimated accruals and...

  • Page 49
    ... 27, 2013. Our products are generally covered by a warranty for periods ranging from 90 days to five years, and for some products we provide a limited lifetime warranty. We accrue for warranty costs as part of our cost of sales based on associated material costs, technical support labor costs, and...

  • Page 50
    .... We use such pricing data as the primary input, to which we have not made any material adjustments during fiscal 2014 and 2013, to make our assessments and determinations as to the ultimate valuation of our investment portfolio. We are ultimately responsible for the financial statements and...

  • Page 51
    ...credits, domestic manufacturing deductions, tax audit settlements, nondeductible compensation, international realignments, and transfer pricing adjustments. Our effective tax rate was 19.2%, 11.1%, and 20.8% in fiscal 2014, 2013, and 2012, respectively. Significant judgment is required in evaluating...

  • Page 52
    ...Fiscal 2013 For fiscal 2014, as compared with fiscal 2013, total revenue decreased by 3%. Product revenue decreased by 5%, while service revenue increased by 4%. The decrease in product revenue reflected declines across all geographic segments as well as across all customer markets. Service revenues...

  • Page 53
    .... The growth in product revenue in the service provider market was due in large part to our acquisition of NDS at the beginning of fiscal 2013. Within the Americas segment, we experienced a product revenue decline in the public sector market, driven by lower sales to the public sector in the United...

  • Page 54
    ... product revenue growth in the commercial and service provider markets and, to a lesser degree, in the public sector market. The growth in product revenue in the service provider market was due primarily to our acquisition of NDS at the beginning of fiscal 2013. From a country perspective, product...

  • Page 55
    ..., modular switching, and storage); NGN Routing (high-end routers, mid-range and low-end routers, and other NGN Routing products); Service Provider Video (infrastructure, video software and solutions); Collaboration (unified communications, Cisco TelePresence, and conferencing); Data Center; Wireless...

  • Page 56
    ...and low-end router products were driven by the continued adoption of our Cisco ISR platform. The decline in sales of other NGN Routing products was due to decreased sales of certain other routing and optical networking products. Service Provider Video Fiscal 2014 Compared with Fiscal 2013 Revenue in...

  • Page 57
    ... continued customer adoption of and migration to the unified access architecture of the Cisco Unified Wireless Network, and also reflects increased sales of new products in this category as well as sales of products related to our acquisition of Meraki. Security Fiscal 2014 Compared with Fiscal 2013...

  • Page 58
    ...initiations associated with product sales provided an installed base of equipment being serviced which, in concert with new service offerings, were the primary factors driving the revenue increases. Advanced services revenue, which relates to consulting support services for specific customer network...

  • Page 59
    ... in the fourth quarter of fiscal 2013. The productivity benefits we experienced in fiscal 2014 were driven by value engineering efforts; favorable component pricing; and continued operational efficiency in manufacturing operations. Value engineering is the process by which production costs are...

  • Page 60
    ... points for fiscal 2013, as compared with fiscal 2012. Although we experienced higher sales volume from growth in both advanced services and in technical support services, the resulting benefit to gross margin was offset by increased cost impacts such as headcount-related costs, partner delivery...

  • Page 61
    ... corporate items for the years presented include the effects of amortization and impairments of acquisition-related intangible assets, share-based compensation expense, significant litigation and other contingencies, impacts to cost of sales from purchase accounting adjustments to inventory...

  • Page 62
    ...distribution channels; price competition, including competitors from Asia, especially those from China; changes in geographic mix of our product revenue; the timing of revenue recognition and revenue deferrals; sales discounts; increases in material or labor costs, including share-based compensation...

  • Page 63
    ...higher headcount-related expenses attributable in large part to our acquisitions. Partially offsetting these costs was lower share-based compensation expense. Sales and Marketing Expenses Fiscal 2014 Compared with Fiscal 2013 Sales and marketing expenses for fiscal 2014, as compared with fiscal 2013...

  • Page 64
    ... data center, software, security, and cloud. Fiscal 2013 Compared with Fiscal 2012 Our headcount increased by 8,410 employees in fiscal 2013. The increase was attributable to the headcount from acquisitions, the largest of which was NDS, as well as targeted hiring in engineering and services. Share...

  • Page 65
    ...and the applicable discount rates represent the rates that market participants would use for valuation of such intangible assets. Restructuring and Other Charges Fiscal 2014 Plan and Fiscal 2011 Plans In August 2013, we announced a workforce reduction plan that would impact up to 4,000 employees, or...

  • Page 66
    ...) The increase in total net gains on available-for-sale investments in fiscal 2014 compared with fiscal 2013 was primarily attributable to higher gains on publicly traded equity securities in the current period as a result of market conditions and the timing of sales of these securities. The change...

  • Page 67
    ... resulted in an effective tax rate of 19.2% for fiscal 2014, compared with 11.1% for fiscal 2013. The net 8.1 percentage point increase in the effective tax rate between fiscal years was primarily attributable to a non-recurring net tax benefit of $794 million, or 7.1 percentage points, due to a tax...

  • Page 68
    ..., the rate at which products are shipped during the quarter (which we refer to as shipment linearity), the timing and collection of accounts receivable and financing receivables, inventory and supply chain management, deferred revenue, excess tax benefits resulting from share-based compensation, and...

  • Page 69
    ... consist primarily of build-to-order and build-to-stock products. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help...

  • Page 70
    .... We provide financing to certain end-user customers and channel partners to enable sales of our products, services, and networking solutions. These financing arrangements include leases, financed service contracts, and loans. Arrangements related to leases are generally collateralized by a security...

  • Page 71
    ... of the Federal Funds rate plus 0.50%, Bank of America's "prime rate" as announced from time to time, or one-month LIBOR plus 1.00% or (ii) LIBOR plus a margin that is based on our senior debt credit ratings as published by Standard & Poor's Financial Services, LLC and Moody's Investors Service, Inc...

  • Page 72
    ... Financial Statements. Purchase Commitments with Contract Manufacturers and Suppliers We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. A significant portion of our reported estimated purchase commitments...

  • Page 73
    ... acquisition closed in the second quarter of fiscal 2014, at which time the former noncontrolling interest holders became eligible to receive up to two milestone payments, which will be determined using agreed-upon formulas based primarily on revenue for certain of Insieme's products. During fiscal...

  • Page 74
    ... of nonpayment by the channel partners or end-user customers. See the previous discussion of these financing guarantees under "Financing Receivables and Guarantees." Securities Lending We periodically engage in securities lending activities with certain of our available-for-sale investments. These...

  • Page 75
    ... Market Risk Our financial position is exposed to a variety of risks, including interest rate risk, equity price risk, and foreign currency exchange risk. Interest Rate Risk Fixed Income Securities We maintain an investment portfolio of various holdings, types, and maturities. Our primary objective...

  • Page 76
    ... in our Consolidated Balance Sheets and are accounted for using primarily either the cost or the equity method. As of July 26, 2014, the total carrying amount of our investments in privately held companies was $899 million, compared with $833 million at July 27, 2013. Some of the privately held...

  • Page 77
    ... service cost of sales. We also enter into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency fluctuations on receivables and payables that are denominated in currencies other than the functional currencies of the entities. The market risks associated...

  • Page 78
    ... and Contingencies ...Note 13: Shareholders' Equity ...Note 14: Employee Benefit Plans ...Note 15: Comprehensive Income ...Note 16: Income Taxes ...Note 17: Segment Information and Major Customers ...Note 18: Net Income per Share ...Supplementary Financial Data ... 71 72 73 74 75 76 77 78 78 78...

  • Page 79
    ... three years in the period ended July 26, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth...

  • Page 80
    ... that the financial information that we provide is timely, complete, relevant, and accurate. Management is responsible for the fair presentation of Cisco's Consolidated Financial Statements, prepared in accordance with accounting principles generally accepted in the United States of America, and has...

  • Page 81
    ...Total current liabilities ...Long-term debt ...Income taxes payable ...Deferred revenue ...Other long-term liabilities ...Total liabilities ...Commitments and contingencies (Note 12) Equity: Cisco shareholders' equity: Preferred stock, no par value: 5 shares authorized; none issued and outstanding...

  • Page 82
    ... per-share amounts) Years Ended July 26, 2014 July 27, 2013 July 28, 2012 REVENUE: Product ...Service ...Total revenue ...COST OF SALES: Product ...Service ...Total cost of sales ...GROSS MARGIN ...OPERATING EXPENSES: Research and development ...Sales and marketing ...General and administrative...

  • Page 83
    CISCO SYSTEMS, INC. Consolidated Statements of Comprehensive Income (in millions) Years Ended July 26, 2014 July 27, 2013 July 28, 2012 Net income ...Available-for-sale investments: Change in net unrealized gains, net of tax benefit (expense) of $(146), $(2), and $6 for fiscal 2014, 2013, and 2012,...

  • Page 84
    ... ...Acquisition of businesses, net of cash and cash equivalents acquired ...Purchases of investments in privately held companies ...Return of investments in privately held companies ...Acquisition of property and equipment ...Proceeds from sales of property and equipment ...Other ...Net cash used in...

  • Page 85
    ... a stock repurchase program. As of July 26, 2014, the Company's Board of Directors had authorized an aggregate repurchase of up to $97 billion of common stock under this program with no termination date. The stock repurchases since the inception of this program and the related impacts on Cisco...

  • Page 86
    ...July. Fiscal 2014, fiscal 2013, and fiscal 2012 are each 52-week fiscal years. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on...

  • Page 87
    ... been settled, and the customer remains current for an appropriate period. The Company facilitates arrangements for third-party financing extended to channel partners, consisting of revolving shortterm financing, generally with payment terms ranging from 60 to 90 days. In certain instances, these...

  • Page 88
    ... fiscal 2014, 2013, and 2012, respectively. Depreciation and amortization are computed using the straight-line method, generally over the following periods: Asset Category Period Buildings Building improvements Leasehold improvements Computer equipment and related software Production, engineering...

  • Page 89
    ...is recognized upon delivery or completion of performance. The Company uses distributors that stock inventory and typically sell to systems integrators, service providers, and other resellers. The Company refers to this as its two-tier system of sales to the end customer. Revenue from distributors is...

  • Page 90
    ... the delivery of a variety of product technologies, including high-end routing, video and network management software, and other product technologies along with technical support and advanced services. The Company's enterprise and commercial arrangements are unique for each customer and smaller...

  • Page 91
    ...of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet...

  • Page 92
    ... expected to be received for those goods or services. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect...

  • Page 93
    ... System (UCS) strategy and enhance application performance by integrating scalable solidstate memory into the UCS's fabric computing architecture. Product revenue from the WhipTail acquisition has been included in the Company's Data Center product category. On July 8, 2014, the Company completed...

  • Page 94
    ...Company's overall strategy to accelerate the adoption of software-based business models that provide new consumption options for customers and revenue opportunities for partners. The Company has included revenue from the Meraki acquisition, subsequent to the acquisition date, in its Wireless product...

  • Page 95
    ... completed during the fiscal years presented have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company's financial results. During the third quarter of fiscal 2013, the Company completed the sale of its Linksys product...

  • Page 96
    ... of the Company's intangible assets acquired through business combinations completed during fiscal 2014 and 2013 (in millions, except years): FINITE LIVES CUSTOMER RELATIONSHIPS WeightedAverage Useful Life (in Years) Amount INDEFINITE LIVES OTHER WeightedAverage Useful Life (in Years) Amount IPR...

  • Page 97
    ... resulting from reductions in expected future cash flows associated with certain of the Company's technology assets. The estimated future amortization expense of purchased intangible assets with finite lives as of July 26, 2014 is as follows (in millions): Fiscal Year Amount 2015 ...2016 ...2017...

  • Page 98
    ... 69 $ - In August 2014 the Company announced a restructuring plan that will impact up to 6,000 employees, representing approximately 8% of its global workforce. The Company expects to take action under this plan beginning in the first quarter of fiscal 2015. The Company currently estimates that it...

  • Page 99
    ...26, 2014 July 27, 2013 Inventories: Raw materials ...Work in process ...Finished goods: Distributor inventory and deferred cost of sales ...Manufactured finished goods ...Total finished goods ...Service-related spares ...Demonstration systems ...Total ...Property and equipment, net: Land, buildings...

  • Page 100
    ... funding for other costs associated with network installation and integration of the Company's products and services. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts...

  • Page 101
    .... The portfolio segment is based on the types of financing offered by the Company to its customers, which consist of the following: lease receivables, loan receivables, and financed service contracts and other. The Company's internal credit risk ratings of 1 through 4 correspond to investment-grade...

  • Page 102
    Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables are presented by contract, and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due ...

  • Page 103
    ..., 2014 are approximately $0.2 billion per year for fiscal 2015, $0.1 billion for fiscal 2016, and less than $0.1 billion per year for each of fiscal 2017 through fiscal 2019. 8. Investments (a) Summary of Available-for-Sale Investments The following tables summarize the Company's available-for-sale...

  • Page 104
    ...presents the realized net gains related to the Company's available-for-sale investments by security type (in millions): Years Ended July 26, 2014 July 27, 2013 July 28, 2012 Net gains on investments in publicly traded equity securities ...Net gains on investments in fixed income securities ...Total...

  • Page 105
    ...cost basis, the financial condition and near-term prospects of the issuer, and the Company's intent and ability to hold the publicly traded equity securities for a period of time sufficient to allow for any anticipated recovery in market value. (c) Maturities of Fixed Income Securities The following...

  • Page 106
    ... in VCE during fiscal 2014, $93 million during fiscal 2013, and $276 million during fiscal 2012. For the period presented, the Company accounted for its investment in VCE under the equity method, and its portion of VCE's net loss is recognized in other income (loss), net. The Company's share of VCE...

  • Page 107
    ... private and public companies, financial condition and near-term prospects of the investees, recent financing activities of the investees, and the investees' capital structure as well as other economic variables, reflected the assumptions market participants would use in pricing these assets...

  • Page 108
    ...In fiscal 2011, the Company established a short-term debt financing program of up to $3.0 billion through the issuance of commercial paper notes. The Company uses the proceeds from the issuance of commercial paper notes for general corporate purposes. In the third quarter of fiscal 2014, the Company...

  • Page 109
    ... the accretion of the discount, and, if applicable, adjustments related to hedging. Interest is payable semiannually on each class of the senior fixed-rate notes and payable quarterly on the floating-rate notes. Each of the senior fixed-rate notes is redeemable by the Company at any time, subject to...

  • Page 110
    ... of America's "prime rate" as announced from time to time, or one-month LIBOR plus 1.00% or (ii) LIBOR plus a margin that is based on the Company's senior debt credit ratings as published by Standard & Poor's Financial Services, LLC and Moody's Investors Service, Inc. The credit agreement requires...

  • Page 111
    ...(LOSSES) FOR THE YEARS ENDED July 26, July 27, July 28, 2014 2013 2012 Derivatives Not Designated as Hedging Instruments Line Item in Statements of Operations Foreign currency derivatives ...Total return swaps-deferred compensation ...Total return swaps-deferred compensation ...Equity derivatives...

  • Page 112
    ... 27, 2013 Derivatives designated as hedging instruments: Foreign currency derivatives-cash flow hedges ...Interest rate derivatives ...Net investment hedging instruments ...Equity derivatives ...Derivatives not designated as hedging instruments: Foreign currency derivatives ...Total return swaps...

  • Page 113
    ... that are due in 2016 and 2017. Under these interest rate swaps, the Company receives fixedrate interest payments and makes interest payments based on LIBOR plus a fixed number of basis points. The effect of such swaps is to convert the fixed interest rates of the senior fixed-rate notes to floating...

  • Page 114
    ... Purchase Commitments with Contract Manufacturers and Suppliers The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times...

  • Page 115
    ... of its cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. The Company's products are generally covered by a warranty for periods ranging from 90 days to five years, and for some products the Company provides a limited lifetime...

  • Page 116
    ... infringe Sprint's patents by offering Voice over Internet Protocol-based telephone services utilizing products provided by the Company and other manufacturers. Sprint is seeking monetary damages. Trial dates have been set for the first half of calendar year 2015. The parties intend to conduct...

  • Page 117
    ... the Company's NGN Routing, Switching and Collaboration products, as well as video solutions deployed by its service provider customers, infringe some of the patents in the Nortel Portfolio. Rockstar seeks monetary damages. A trial date for one service provider customer has been set for October 2015...

  • Page 118
    ...the Board of Directors may determine the rights, preferences, and terms of the Company's authorized but unissued shares of preferred stock. 14. Employee Benefit Plans (a) Employee Stock Incentive Plans Stock Incentive Plan Program Description As of July 26, 2014, the Company had four stock incentive...

  • Page 119
    ... the end of the three-year requisite service period or earlier if the award recipient meets certain retirement eligibility conditions. The Compensation and Management Development Committee of the Board of Directors has the discretion to use different vesting schedules. Stock appreciation rights may...

  • Page 120
    ..., stock purchase rights, restricted stock, and restricted stock units granted to employees. The following table summarizes share-based compensation expense (in millions): Years Ended July 26, 2014 July 27, 2013 July 28, 2012 Cost of sales-product ...Cost of sales-service ...Share-based compensation...

  • Page 121
    ... Restricted Stock and Stock Unit Awards A summary of the restricted stock and stock unit activity, which includes time-based and performance-based or market-based restricted stock units, is as follows (in millions, except per-share amounts): Restricted Stock/ Stock Units Weighted-Average Grant Date...

  • Page 122
    ... return (TSR) component of the PRSUs using a Monte Carlo simulation model. The assumptions for the valuation of time-based RSUs and PRSUs are summarized as follows: Years Ended RESTRICTED STOCK UNITS July 26, 2014 July 27, 2013 July 28, 2012 Number of shares granted (in millions) ...56 Grant date...

  • Page 123
    ... payouts at the grant date. (h) Employee 401(k) Plans The Company sponsors the Cisco Systems, Inc. 401(k) Plan (the "Plan") to provide retirement benefits for its employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary contributions and...

  • Page 124
    ..., with line item location, during each period were as follows (in millions): Comprehensive Income Components July 26, 2014 July 27, 2013 July 28, 2012 Income Before Taxes Line Item in Statements of Operations Net unrealized gains on available-for-sale investments $300 Net unrealized gains and...

  • Page 125
    ...During fiscal 2013, the Internal Revenue Service (IRS) and the Company settled all outstanding items related to the audit of the Company's federal income tax returns for the fiscal years ended July 27, 2002 through July 28, 2007. As a result of the settlement, the Company recognized a net benefit to...

  • Page 126
    ... at the end of fiscal 2015. As of the end of fiscal 2013 and fiscal 2012, the gross income tax benefits attributable to tax incentives were estimated to be $1.4 billion and $1.3 billion ($0.26 and $0.24 per diluted share) for each of the respective years. The gross income tax benefits were partially...

  • Page 127
    ... makes financial decisions and allocates resources based on the information it receives from its internal management system. Sales are attributed to a segment based on the ordering location of the customer. The Company does not allocate research and development, sales and marketing, or general and...

  • Page 128
    ...), and wide-area networks (WANs). The following table presents revenue for groups of similar products and services (in millions): Years Ended July 26, 2014 July 27, 2013 July 28, 2012 Revenue: Switching ...NGN Routing ...Service Provider Video ...Collaboration ...Data Center ...Wireless ...Security...

  • Page 129
    ...of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet...

  • Page 130
    ... and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required...

  • Page 131
    ...accounting officer. This code of ethics, which consists of the "Special Ethics Obligations for Employees with Financial Reporting Responsibilities" section of our Code of Business Conduct that applies to employees generally, is posted on our website. The Internet address for our website is www.cisco...

  • Page 132
    ... Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm" in our Proxy Statement related to the 2014 Annual Meeting of Shareholders, and is incorporated herein by reference. PART IV Item 15. Exhibits and Financial Statement Schedules...

  • Page 133
    ... the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. September 9, 2014 CISCO SYSTEMS, INC. /S/ JOHN T. CHAMBERS John T. Chambers Chairman and Chief Executive Officer POWER OF ATTORNEY...

  • Page 134
    ... Date /S/ MICHAEL D. CAPELLAS Michael D. Capellas Director September 9, 2014 /S/ BRIAN L. HALLA Brian L. Halla Director September 9, 2014 /S/ JOHN L. HENNESSY Dr. John L. Hennessy Director September 9, 2014 /S/ KRISTINA M. JOHNSON Dr. Kristina M. Johnson Director September 9, 2014...

  • Page 135
    ...) Cisco Systems, Inc. WebEx Acquisition Long-Term Incentive Plan. (amends and restates the WebEx Communications, Inc. Amended and Restated 2000 Stock Incentive Plan) (including related form agreements) Cisco Systems, Inc. Employee Stock Purchase Plan Cisco Systems, Inc. Deferred Compensation Plan...

  • Page 136
    ... Plan Form of Executive Officer Indemnification Agreement Form of Director Indemnification Agreement Relocation Agreement between Cisco Systems, Inc. and Charles Robbins Credit Agreement dated as of February 17, 2012, by and among Cisco Systems, Inc. and Lenders party thereto, and Bank of America...

  • Page 137
    ... San Jose, California Notice of Annual Meeting Cisco Systems, Inc. Building 9 260 East Tasman Drive San Jose, CA 95134 Thursday, November 20, 2014 9 a.m. Pacific Time * Lead Independent Director (1) Member of the Acquisition Committee (2) Member of the Audit Committee (3) Member of the Compensation...

  • Page 138
    ...; variations in customer demand for products and services, including sales to the service provider market and other customer markets; the return on our investments in certain priorities and in certain geographical locations; the timing of orders and manufacturing and customer lead times; changes in...

  • Page 139
    ...Report 2014 Corporate Information Company Profile Celebrating its 30th anniversary this year, Cisco designs, manufactures, and sells Internet Protocol (IP)-based networking products and services related to the communications and information technology (IT) industry. Our customers include businesses...

  • Page 140
    WORLDWIDE OFFICES Americas Headquarters San Jose, California, USA Asia Pacific Headquarters Singapore Europe Headquarters Amsterdam, Netherlands Cisco has more than 200 offices worldwide. Addresses, phone numbers, and fax numbers are listed on the Cisco website at www.cisco.com/go/o ces.